Changes to the overseas investment regime, announced in 2010, took effect last month.
As outlined in our November 2010 update, the government decided to add 2 new factors to the Overseas Investment Regulations. The new factors give Ministers extra flexibility (ie, greater discretion) to consider a wider range of issues when determining whether an overseas investment in sensitive land is likely to benefit New Zealand.
The addition of the 2 new factors might have taken some by surprise, particularly given that when it announced the Overseas Investment Review in March 2009, the government said the then current rules were complex and that "processing a sensitive land application involves the assessment of 27 criteria and factors. The process is too long and too uncertain."
The new factors are:
- An "economic interests" factor, which requires consideration of whether New Zealand's economic interests will be adequately promoted by the overseas investment
- A "mitigation" factor, which requires consideration of the extent to which the investment will provide opportunities for New Zealanders to oversee or participate in the investment.
As enacted, each new factor has a non-exclusive list of examples to illustrate matters that may be considered when applying the factor.
For the economic interests factor, matters that may be considered are:
- Whether New Zealand will become a more reliable supplier of primary products in the future
- Whether New Zealand's ability to supply the global economy with a product that forms an important part of New Zealand's export earnings will be less likely to be controlled by a single overseas person or its associates
- Whether New Zealand's strategic and security interests are or will be enhanced
- Whether New Zealand's key economic capacity is or will be improved.
For the mitigation factor, matters that may be considered are:
- Whether there is or will be any requirement that one or more New Zealanders must be part of a relevant overseas person's governing body
- Whether a relevant overseas person is or will be incorporated in New Zealand
- Whether a relevant overseas person has or will have its head office or principal place of business in New Zealand
- Whether a relevant overseas person is or will be a party to a listing agreement with NZX or any other registered exchange that operates a securities market in New Zealand
- The extent to which New Zealanders have or will have any partial ownership or controlling stake in the overseas investment or in a relevant overseas person
- The extent to which ownership or control of the overseas investment or relevant overseas person is or will be dispersed amongst a number of non-associated overseas persons.
A new Ministerial directive letter to the Overseas Investment Office has also been issued. The letter directs the OIO to give the 2 new factors high relative importance when determining whether an overseas investment in a "large" area of farm land is likely to benefit New Zealand. "Large" is defined as being 10 times the average size of the particular type of farm. The OIO has published a list of average farm sizes by farm type.
For example, the average size of a dairy farm is 172ha. This means that the new factors will be of high relative importance when:
- an overseas person seeks to acquire a dairy farm of 1720ha or larger; or
- as a result of an acquisition, the total area of the overseas person's dairy farm interests would be 1720ha or larger.
The unexpected tightening of the regime reflects increased public interest in foreign investment during the 18 month review, sparked especially by a proposal by Hong Kong based company, Natural Dairy, to acquire 16 dairy farms owned by the Crafar family. Natural Dairy's applications for consent were considered under the old regime and declined in December 2010 because the "good character" criterion was not met. That calls into question the need for the changes, as the concerns about Natural Dairy's proposed investment were able to be addressed under the existing Act.
In most cases, the changes to the regime are unlikely to have a significant impact on the ability of overseas persons to invest in New Zealand. However, when large areas of farm land are being acquired, the OIO and Ministers will have greater flexibility and discretion in deciding whether consent should be granted. The recent announcement that the Crafar Farms have a new overseas bidder who will apply for consent in March means that the application of the new factors will soon be put to the test.